As the UK£7.71M market cap Rosslyn Data Technologies plc (AIM:RDT) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Rosslyn Data Technologies is spending more money than it earns, it will need to fund its expenses via external sources of capital. Rosslyn Data Technologies may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. See our latest analysis for Rosslyn Data Technologies
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, Rosslyn Data Technologies has UK£1.02M in cash holdings and producing negative cash flows from its day-to-day activities of -UK£2.56M. How fast Rosslyn Data Technologies runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the exciting, fast-growing tech industry often face this problem, and Rosslyn Data Technologies is no exception. The industry is highly competitive, with companies racing to invest in innovation at the risk of burning through its cash too fast.
When will Rosslyn Data Technologies need to raise more cash?
Operational expenses, or opex for short, are the bare minimum expenses for Rosslyn Data Technologies to continue its operations. In this case I've only accounted for sales, general and admin (SG&A) expenses, and basic R&D expenses incurred within this year. Opex (excluding one-offs) grew by 8.26% over the past year, which is fairly normal for a small-cap. This means that, if Rosslyn Data Technologies continues to grow its opex at this rate, given how much money it currently has in the bank, it will actually need to raise capital again within the next couple of months! This is also the case if Rosslyn Data Technologies maintains its opex level of UK£6.36M, without growth, going forward. Even though this is analysis is fairly basic, and Rosslyn Data Technologies still can cut its overhead in the near future, or raise debt capital instead of coming to equity markets, the analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
Next Steps:This analysis isn’t meant to deter you from Rosslyn Data Technologies, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current opex growth rate and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Rosslyn Data Technologies come to market to fund its growth. I admit this is a fairly basic analysis for RDT's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Rosslyn Data Technologies to get a more holistic view of the company by looking at:
- 1. Valuation: What is RDT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RDT is currently mispriced by the market.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Rosslyn Data Technologies’s board and the CEO’s back ground.
- 3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.